The end of geography and roaming in telecoms

Today most people are familiar with services such as Skype. Effectively a location independent mobile service, with Skype it does not matter where people call from nor does it matter where the called party is located. Geography has become irrelevant. By the end of Q4 2012, it was anticipated that roughly 50 per cent of international call traffic is likely to have taken place via Skype and similar services rather than traditional carrier traffic.

More and more people are installing Skype on their handsets or using Facetime on their iPhone, and they are getting used to the fact that calling from their mobile phones doesn’t necessarily have to involve the mobile operator. What’s more they also get video telephony. Increasingly people use WiFi on their smartphones, both at home, at work and in public places. The introduction of WPA2 as well as SIM based authentication which allows automatic connection to a WiFi network without signing in makes it easy for users to route their traffic via WiFi and opt out of traditional telephony.  Operators such as Rebtel in Sweden and Republic Wireless in the USA focus on this opportunity – these mobile operators that use WiFi offload “push” their customers to make calls using Skype like services.

The trend away from making standard mobile voice calls is accelerating with the adoption of LTE. For example, in contrast to older versions of the iPhone, the new iPhone with Apple’s iOS 6 upgraded FaceTime from a WiFi only feature to a cellular feature. AT&T Wireless was the first to allow customers to use FaceTime over LTE if they signed up to their new shared data tariff plan.

During 2013 we will see the start of a fundamental reshaping of mobile telecoms service offerings driven by new services based on the IP Multimedia Subsystem (IMS), the evolution of mobile wholesale as well as regulatory trends. Some operators may go all the way and break the link between the mobile telephone numbers and geography. After all it seems somewhat archaic that in a world where distance does not matter, mobile operator tariffs are still based on location and distance. Location is not an issue with Skype or FaceTime and this is one of the reasons for the success of these OTT operators.

Some operators have already introduced services based on IMS, for example in Canada the Rogers One Number service allows the seamless switching between a smartphone and computer. It allows mobile operators to leverage the proliferation of free WiFi connectivity to in effect extend their network coverage world-wide.  This allows mobile operators to fight back against OTT services such as Skype, WhatsApp and FaceTime by in effect becoming themselves an “OTT over WiFi” player.

There are also traditional mobile services that allow users to avoid roaming charges and thus take at least one aspect of geography out of equation that already exists for voice (Truphone, WoldSIM and other) and data (roamline.com, in collaboration with KPN). The business model is built on exploiting the difference between lower wholesale prices paid by MVNOs versus high inter-operator roaming tariffs by offering customer SIMs with multiple numbers in different countries.

The opportunity to take geography out of mobile pricing is not limited to roaming. For example, Turk Telecom launched a service in Germany and Belgium aimed at the Turkish ethnic segment in these countries. Customers are charged exactly the same amount to call numbers in Belgium or Turkey. Turkcell could add the ability to recharge linked accounts (a Turkish person working in Belgium can recharge the prepaid SIM of relatives in Turkey) and make small mobile payments across borders. Smart, of the Philippines is already going down this route, targeting the Filipino diaspora segment around the world.

As a result of these trends in international call pricing as well as roaming, Geography may soon become irrelevant.

Written by Stefan Zehle, CEO, Coleago Consulting

The Network Sharing Conundrum

By Sharad Sharma, Senior Consultant, Coleago Consulting Ltd

Network sharing is gaining momentum

Mobile operators worldwide are struggling to increase the ARPU where voice, the main source of revenue source is commoditised and the data is yet to carve its way to be a high revenue generator. However, in order to maintain the technological leadership in the market, high investments are still needed in the networks whether it is a developed economy or a developing economy. The operators are facing a big challenge to justify the investments in the network. As a result operators look to identify cost cutting opportunities. Some of the costs saving initiatives are easy to tackle but the others like network sharing and network outsourcing involve business transformation of high degree.

Network sharing as a cost saving initiative has been gaining momentum in the different countries but also to improve performance. Tower sharing and national roaming has been around for quite a while now with operators across the globe are sharing towers for speedy network deployment. Originally Network Sharing was looked at in the light of revenue generation for incumbents and a more favourable to greenfield operators, helping the latter to increase roll out coverage faster. However, today network sharing is viewed from the angle of cost reduction.

Forming separate entities to pool tower assets or an entity to manage a consolidated network in the case of RAN sharing are of interests to many operators. However, there may be trouble ahead if such agreements are not thought through correctly: A cookie will always taste different when two different people make it even if it is the same recipe. These initiatives are now a trend and the decision to implement is taken without a detailed assessment of the opportunity. It is very important to assess the market dynamics and company’s own capability before actually going ahead with the network sharing. Many questions need to be answered before making a decision as to the network sharing model, the partner, the scope and the structure of the agreement. Two of the major questions that arise are the risk of losing the network related competitive advantage and the risk of degraded quality.

Network as a competitive advantage

The increasing number of smart phones is making the customers now much more aware of network quality / capacity / congestion as variations in service quality for data services are much more apparent and much more frustrating. Operators have pursued different strategies in terms of network investment for data capacity and as a result there are greater variations in network performance and customers are more aware of the differences. As a result network once again has become a source of competitive advantage. This may well lead operators to turn away from network sharing deals as they would not want to neutralise their advantageous position.

But are these strategies giving an operator a sustainable competitive advantage or is it just a short lived like any other voice quality improvement that the customers forget after all operators achieved equality. On the other hand, is it possible to gain this competitive advantage by a cost saving initiative like network sharing? The answer depends on the case.

For example, in the UK, most operators in UK claim 99 per cent geographical coverage. Now boasting of superior network quality with a combined network can be seen in the advertising campaigns. The operators like ‘3’ and T-mobile after implementing RAN sharing are claiming a better network coverage and quality while T-Mobile now ringing bells of combined Orange and T-Mobile network. Vodafone and O2 in turn moved into a tower sharing model. However, in developing countries where the networks are less mature, the implications are different because geographic coverage roll-out continues to be an issue.

Network capacity and congestion

An issue with network sharing arises in the context of capacity upgrades. Particularly in respect to mobile broadband the challenge is forecasting the capacity requirements not the network sharing or technology. If the forecasting is smartly managed for both the radio access and transmission backhaul, capacity issues could be overcome easily. However it does raise issues with regards to sharing sensitive commercial information between competitors.

Should we share now or wait?

When competition is based largely on price, the competitive advantage resides with the lowest cost operator. The lowest cost operator is probably an operator with a network sharing deal in place. An operator who currently enjoys a leading market share position and therefore decides to delay sharing may well find that when their advantage is neutralised, there are no network sharing deals to be done as all competing operators have entered into agreements. In the long run this market leader may well suffer because he no longer has the lowest cost operation and therefore would be unable to compete on price. Resolving the conundrum requires careful consideration and a valuation of the relative benefits of network superiority versus cost sharing. As with any strategic decision, timing is everything.

Austrian 2.6GHz spectrum auction results show some consistency with previous auctions but the picture is still confusing

The Austrian regulator RTR concluded the auction of 140MHz of paired spectrum and 50MHz of unpaired spectrum raising proceeds of €39.5 million from the four incumbent operators Telkom, Hutchison, T-Mobile and Orange. The benchmark for the paired spectrum of approximately €0.04 is at a similar level to the results from the German auction which also saw the 4 incumbents secure spectrum but 4 times lower than the Danish auction, another market with 4 existing operators. Whilst relative levels of spectrum supply relative to operator demand is often a significant determinant of spectrum prices achieved at auction it is clearly not the full story.

Austria has one of the most competitive and developed mobile broadband markets in Europe and the need for capacity should have pushed prices higher. However, unusually the RTR attached roll-out requirements to the 2.6GHz band requiring 25% of the population to be provided with coverage with a downlink of 1 MBit/s and 256 KBit/s on the uplink by no later than December 2013. This represents an onerous requirement for operators as it will require them to deploy LTE sooner than perhaps they might have preferred. The coverage requirements will have depressed auction prices. Attaching coverage requirements to the 2.6GHz spectrum is unusual as coverage is usually addressed through lower frequency spectrum bands such as 900MHz and 800MHz as the propagation characteristics of the lower bands are more suited to providing coverage. The mix of strong demand and onerous roll-out conditions mean that the auction results provide little additional insight for regulators and operators who have yet to auction the spectrum.

The relative prices for paired and unpaired spectrum also remains confusing as Hutchison paid less in total for its paired and unpaired spectrum (a total of 65MHz) compared to T-Mobile which only acquired 40MHz of paired spectrum. This outcome is however more likely to be due to the algorithm (effectively a second price rule) used by the regulator to determine the final prices.
The use of second price rules, where the highest bidder wins but only has to pay the amount of the 2nd highest bidder, tends to result in more economically efficient allocations of spectrum but it can lead to interesting variations in price for similar lots. For example Telkom paid 20% more for the same amount of spectrum as Hutchison and T-Mobile paid 40% more on a €/MHz/Pop for its 40MHz of paired spectrum than Orange paid for its 20MHz and the difference is unlikely to be explained in full by differences in spectral efficiencies of LTE in wider bands
As countries such as Switzerland, Spain and the UK prepare to auction spectrum in the 2.6GHz band the Austrian auction provide some insight into the potential value of the spectrum but considerable uncertainty remains.

Why mobile data should be more like mustard

Industry analysts and commentators continue to marvel at the “growth in demand” for mobile data and indeed some mobile networks are groaning under the strain. It appears however that the meaning of the word demand has been forgotten. Demand, in an economic sense, relates to the willingness to pay. One could say that there is a “high demand” for Ferraris as who would not want one, but few can afford them which is why they are not clogging up the motorways.

The prevalence of unlimited or “all you can eat” data offerings has resulted in significant growth in traffic but not revenue as the link between demand and the willingness to pay has been broken. Unlimited offers made some economic sense two years ago when adoption of mobile broadband was low and networks had unutilised capacity. Two years ago incremental traffic did not necessarily result in incremental capital expenditure. Networks are now congested and increasing traffic is resulting in increasing capex without increasing revenues which can only depresses returns to shareholders.

Pricing structures need to change if the economics of mobile data are to improve. Within a mobile operators’ customer base there are usually a relatively small proportion of customers who use a very high proportion of network resources. These “bandwidth hogs” should be charged for the data that they use or their usage should be constrained. In fact mobile operators should start to look at mobile data a little more like mustard.

Since 1814 Jeremiah Colman of Colman’s English mustard has been making his money not by how much mustard people eat but how much they left on the side of the plate. If you are going to charge somebody £15 a month for 2GB the customers you actually want are those who use only a quarter of their allowance. Studies show the average smartphone user is using a lot less than 2 GB a month, and perhaps a tenth of what the average dongle user gets through. If operators started to think about mobile data a bit more like mustard we might see an improvement in industry returns.